MATHS 7070 - Financial Modelling: Tools & Techniques

North Terrace Campus - Semester 2 - 2015

The growth of the range of financial products that are traded on financial markets or are available at other financial institutions, is a notable feature of the finance industry. A major factor contributing to this growth has been the development of sophisticated methods to price these products. The significance to the finance industry of developing a method for pricing options (financial derivatives) was recognized by the awarding of the Nobel Prize in Economics to Myron Scholes and Robert Merton in 1997. The mathematics upon which their method is built is stochastic calculus in continuous time. Binomial lattice type models provide another approach for pricing options. These models are formulated in discrete time and the examination of their structure and application in various financial settings takes place in a mathematical context that is less technically demanding than when time is continuous. This course discusses the binomial framework, shows how discrete-time models currently used in the financial industry are formulated within this framework and uses the models to compute prices and construct hedges to manage financial risk. Spreadsheets are used to facilitate computations where appropriate. Topics covered are: The no-arbitrage assumption for financial markets; no-arbitrage inequalities; formulation of the one-step binomial model; basic pricing formula; the Cox-Ross-Rubinstein (CRR) model; application to European style options, exchange rates and interest rates; formulation of the n-step binomial model; backward induction formula; forward induction formula; n-step CRR model; relationship to Black-Scholes; forward and future contracts; exotic options; path dependent options; implied volatility trees; implied binomial trees; interest rate models; hedging; real options; implementing the models using EXCEL spreadsheets.

Open All

Course Details

Course Code	MATHS 7070
Course	Financial Modelling: Tools & Techniques
Coordinating Unit	Mathematical Sciences
Term	Semester 2
Level	Postgraduate Coursework
Location/s	North Terrace Campus
Units	3
Contact	up to 3 hours per week
Available for Study Abroad and Exchange	Y
Prerequisites	MATHS 1010 or MATHS 1011
Incompatible	APP MTH 3011, APP MTH 7070, APP MTH 3012
Assumed Knowledge	Familiarity with Excel spreadsheets
Assessment	Ongoing Assessment 30%, Exam 70%

Course Staff

No information currently available.

Course Timetable

The full timetable of all activities for this course can be accessed from .

Course Learning Outcomes

On successful completion of this course students will be able to:

1. demonstrate an understanding of basic financial market concepts
2. construct binomial tree models
3. price a wide variety of contingent claims using principles of non-arbitrage

University Graduate Attributes

This course will provide students with an opportunity to develop the Graduate Attribute(s) specified below:

University Graduate Attribute	Course Learning Outcome(s)
Knowledge and understanding of the content and techniques of a chosen discipline at advanced levels that are internationally recognised.	all
An ability to apply effective, creative and innovative solutions, both independently and cooperatively, to current and future problems.	all
A proficiency in the appropriate use of contemporary technologies.	all

Learning Resources

Required Resources

None.

Recommended Resources

1. Binomial Models in Finance by J Van Der Hoek and R Elliot, Cambridge
2. Elementary Calculus of Financial Mathematics by Roberts, Cambridge
3. Options Futures and Other Derivatives 7th ed. by Hull, PearsonOnline Learning

Online Learning

This course uses MyUni exclusively for providing electronic resources, such as lecture notes, assignments, sample solutions etc.
Learning & Teaching Activities

Learning & Teaching Modes

This course relies on lectures as the primary delivery mechanism for the material. Tutorials supplement the lectures by providing exercises and sample problems. A sequence of of written assignments provides assessment opportunities for students to gauge their progress and understanding.

Workload

The information below is provided as a guide to assist students in engaging appropriately with the course requirements.

Activity Quantity Workload Hours

Lectures 30 90

Tutorials 5 18

Assignments 5 48

Total 156

Learning Activities Summary

Lecture Outline
1. Call options - European
2. Call options - American
3. Binomial assett pricing model
4. Price derivatives using risk neutral probabilities
5. Forward contracts
6. Multipstep binomial models (2 lectures)
7 Arrow-Debreu securities and state prices (2 lectures)
8. Cox-Ross-Rubinstein (CRR) convergence, Black Scholes formula (2 lectures)
9. Calculations with the Black-Scholes formula (2 lectures)
10. Generalise multistep models
11. Pricing American options with CRR multistep model
12. Barrier options
13. Forward commodity contracts
14. Forward currency contracts (2 lectures)
15. Interest rate derivatives (2 lectures)
16. Ho and Lee model for interest rates (2 lectures)
17. Futures markets (2 lectures)
18. Hedging and contingent claims (2 lectures)
19. Sensitivity of options (2 lectures)
20. Options with dividend paying assets
21. Review lecture

Tutorial Outline

1. Call options, one-step binomial pricing model
2. CRR model
3. Three-step CRR model and Arrow-Debreu prices
4. Pricing American options in a two-step CRR model
5. The ‘Greeks’ and delta hedging

Assignment Outline

1. One-step binomial model
2. Two-step CRR model, Black-Scholes model
3. Pricing American options using the CRR model
4. Forward and futures contracts
5. Delta hedging, Ho-Lee model

The University's policy on Assessment for Coursework Programs is based on the following four principles:

Assessment must encourage and reinforce learning.
Assessment must enable robust and fair judgements about student performance.
Assessment practices must be fair and equitable to students and give them the opportunity to demonstrate what they have learned.
Assessment must maintain academic standards.

Assessment Summary

Component	Weighting	Objective Asssessed
Assignments	30%	all
Exam	70%	all

Assessment Related Requirements

An aggregate score of at least 50% is required to pass this course.

Assessment Detail

Assessment Item	Distributed	DueDate	Weighting
Assignment1	Week 2	Week 3	6%
Assignment2	Week 4	Week 5	6%
Assignment3	Week 6	Week 7	6%
Assignment4	Week 8	Week 8	6%
Assigment 5	Week 10	Week 11	6%

Submission

1. All written assignments are to be submitted to the designated hand-in boxes in the School of Mathematical Sciences with a signed cover sheet attached.
2. Late assignments will not be accepted.
3. Assignments will have a two week turn-around time for feedback to students.

Course Grading

Grades for your performance in this course will be awarded in accordance with the following scheme:

M10 (Coursework Mark Scheme)
Grade	Mark	Description
FNS		Fail No Submission
F	1-49	Fail
P	50-64	Pass
C	65-74	Credit
D	75-84	Distinction
HD	85-100	High Distinction
CN		Continuing
NFE		No Formal Examination
RP		Result Pending

Further details of the grades/results can be obtained from Examinations.

Grade Descriptors are available which provide a general guide to the standard of work that is expected at each grade level. More information at Assessment for Coursework Programs.

Final results for this course will be made available through .

Student Feedback

The University places a high priority on approaches to learning and teaching that enhance the student experience. Feedback is sought from students in a variety of ways including on-going engagement with staff, the use of online discussion boards and the use of Student Experience of Learning and Teaching (SELT) surveys as well as GOS surveys and Program reviews.

SELTs are an important source of information to inform individual teaching practice, decisions about teaching duties, and course and program curriculum design. They enable the University to assess how effectively its learning environments and teaching practices facilitate student engagement and learning outcomes. Under the current SELT Policy (http://www.adelaide.edu.au/policies/101/) course SELTs are mandated and must be conducted at the conclusion of each term/semester/trimester for every course offering. Feedback on issues raised through course SELT surveys is made available to enrolled students through various resources (e.g. MyUni). In addition aggregated course SELT data is available.
Student Support
Policies & Guidelines
This section contains links to relevant assessment-related policies and guidelines - all university policies.
Fraud Awareness

Students are reminded that in order to maintain the academic integrity of all programs and courses, the university has a zero-tolerance approach to students offering money or significant value goods or services to any staff member who is involved in their teaching or assessment. Students offering lecturers or tutors or professional staff anything more than a small token of appreciation is totally unacceptable, in any circumstances. Staff members are obliged to report all such incidents to their supervisor/manager, who will refer them for action under the university's student鈥檚 disciplinary procedures.

The 成人大片 is committed to regular reviews of the courses and programs it offers to students. The 成人大片 therefore reserves the right to discontinue or vary programs and courses without notice. Please read the important information contained in the disclaimer.

Authorised by:	Deputy Vice-Chancellor and Vice-President (Academic)
Maintained by:	Course Outlines Administrator

成人大片